Oil prices retreat amid China's economic slowdown and prospects of prolonged US rates

18 Aug 2023 , 09:51 AM

On Friday, oil prices seemed poised to conclude a seven-week winning streak as losses were triggered by concerns about demand growth in China due to its slowing economy and the potential for higher, sustained U.S. rates.

The major benchmarks showed little change on Friday, with Brent crude at $84.12 a barrel, and U.S. West Texas Intermediate crude (WTI) up by 10 cents, or 0.1%, at $80.49 a barrel.

Oil prices were held in check by the U.S. Federal Reserve’s focus on curbing inflation in the face of stronger-than-expected economic figures.

On Thursday, the U.S. Labor Department announced that fewer Americans had filed new claims for unemployment benefits in the previous week, raising the prospect that the still-tight labor market could extend the Fed’s drive to tighten financial conditions and slow down the economy.

Earlier in the week, the U.S. retail sales report, along with other equally optimistic economic reports, collectively indicated that the Fed might need to maintain higher interest rates for an extended period.

Investors are concerned that increasing borrowing costs could impede economic expansion and subsequently reduce overall demand, which would consequently impact oil demand.

Recent economic data from China, the world’s second-largest oil consumer, has exacerbated concerns. The data has indicated a significant decline in economic momentum since the second quarter.

China’s stumbling economy has disrupted global financial markets in recent months, causing investors to worry about potential contagion effects.

However, in July, China executed an unprecedented withdrawal from its crude oil reserves, marking the country’s first storage withdrawal in 33 months.

As a result of robust exports and refining run rates, U.S. crude oil stockpiles decreased by approximately 6 million barrels last week, according to data released this week. The weekly inventory of goods, serving as a demand proxy, reached its highest level since December.

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